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IMF backpedals on criticism of UK austerity

George Osborne and Christine Lagarde do agree about something though: the housing market is a risk to the economic recovery.

by Rachel Savage

Published: 06 Jun 2014

Last Updated: 27 Aug 2014

Time for George Osborne to allow himself a smug smile: IMF chief Christine Lagarde has admitted the government’s current mix of spending cuts and tax rises is ‘sensible’. A definitive volte-face after last year, when the IMF warned the government was ‘playing with fire’.

That should bring to an end to the war of words between the fund and the Chancellor over austerity, especially as the two also agree on something else: the housing market is a risk to the economy.

‘I agree with Christine Lagarde that we need to be alert to the build-up of debt in the housing market. We need to be alert when we see house prices rising,’ Osborne told the BBC. MT can just feel the love…

The Chancellor did, however, rather neatly pass the buck, claiming he had ‘given the Bank of England tools’ to avert another property crash. However, as the IMF pointed out, and as MT has been banging on about for, like, ever, rocketing house prices are caused, in large part, by a lack of new homes.

‘Fundamentally, house prices are rising because demand outstrips supply,’ the IMF report said. ‘Macroprudential and monetary policies can only be temporary palliatives to an underlying problem.’ In other words, Carney can’t fix planning laws.

Lagarde admitted that the IMF ‘clearly underestimated’ UK economic growth last year, although she did note that most other forecasters got it wrong too. It wasn’t all backpedalling though. Lagarde pointed out exports weren’t doing as well as consumption and investment at the moment (but whether increasing investment will filter through to boost low productivity is still an open question).

The IMF chief also poured cold water on the idea of her becoming the European Commission president, saying she was ‘not a candidate’ because ‘I have a job...and it’s a job I happen to think is rather important at the moment’.

Although Lagarde could potentially still become a candidate – she refused to rule herself out 100% - the UK and Germany will probably have to just put up and shut up with brusque Luxembourgeois Jean-Claude Juncker.